Car fringe benefit reforms introduced into Parliament

Further to the reform announced in the Federal Budget, the Government has introduced into the Parliament on 2 June 2011 Tax Laws Amendment (2011 Measures No. 5) Bill 2011 (the Bill) which details changes to the statutory formula method in calculating the taxable value of car fringe benefits provided as well as associated transitional arrangements.

The proposed legislation seeks to replace the current tiered statutory rates with a flat rate of 20% applicable regardless of the distance travelled from 1 April 2014.

The operating cost method remains unchanged and is available as an alternative option for employers.

Transitional rules

Broadly, the currently tiered statutory rates would still apply to an existing arrangement provided a financially binding commitment has been agreed to prior to 7:30pm 10 May 2011 in relation to a particular car.  The car benefit does not need to have been delivered by 10 May 2011.

The Explanatory Memorandum (EM) to the Bill also provided a range of scenarios under which the transitional rules will apply to arrangements entered after 7:30pm 10 May 2011.  They include:

  • Any changes made to existing arrangements after 7:30pm 10 May 2011 will be considered new commitments and subject to the new rules.
  • Extension of an existing arrangement would also be considered a new contract and subject to the new rules.
  • Where an employer is taken over by another company, existing arrangements previously held by the employer would also be caught by the new rules from that date.

However, the transitional statutory rates would not apply to any of the above changes until the beginning of the next fringe benefits tax (FBT) year.

For the transitional statutory rates please refer to the article "Update on proposed FBT measures."

Skipping the transitional rules

The Bill also contains a provision allowing employers to elect to apply the flat statutory rate of 20% directly but this is only subject to the affected employees not being worse off financially as a result of that election and giving their consent.

Anti-avoidance provisions

The EM also cautioned against employers and employees who have sought to end existing contracts early and who immediately entered into new contracts to get the benefit of the new arrangements will be subject to the general anti-avoidance provisions.

Whilst the proposed legislation has provided some clarifications on the initial uncertainties surrounding changes to existing car fringe benefits arrangements, it does not alleviate employers from additional administrative burden in trying to correctly navigate through the myriad of new rules over the next three FBT years.

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